Lloyds Banking Q3

Q3 PPI & Conduct hit


Q3 has new conduct charges of £1.15bn (PPI & Conduct) is ahead of expectations of c £800m-£900m. The PPI and conduct charges and a higher tax charge have hit Q3 net profit sending it to £219m (EPS 0.2p). Underlying profit (Q1-Q3 2016) of £6.07bn fell £282m of which £118m is attributable the Q1-Q3 2015 profit contribution from TSB (now sold).

Lloyds Bk Q1-Q3 2016 Q1-Q3 2015 Q3 2016 COMMENT
PPI provision £1bn £1.9bn £1bn Q3 is entire 9 month provision
Other conduct provision £610m £535m £150m Negative trend

The Q3 PPI provision whilst higher than expected is possibly very close to the total FY16 provision (released early). PPI is 47% lower than 2015 and trending towards possibly a £500m charge in FY17. Lloyds “other conduct” provisions are elevated on a quarterly run rate basis and in the wrong direction relative to 2015.

Lloyds has made progress on “Simplification” delivering £774m of annual savings and on target for £1.4bn of savings by end 2017. The board recently announced staff cost savings of c £1bn (12 October 2016) post the Q3 reporting cut-off date of 30th September 2016.

Elsewhere the impact of “Brexit” has seen a QTR 1% decline in loan advances (£452bn), not a bad performance in our view, at least relative to the UK banking peer group. Likewise Lloyds capital levels (pre dividend) at 14.1% are the highest in the UK sector.

Lloyds Banking has reclassified £20bn of its gilt holdings as “available for sale” hence their price will be “marked to market” – (this introduces some variability to the results going forward; a 1% adverse move in gilts equates to -£200m profit) from their previous classification of “Held to maturity” – where assets are held at their cost less depreciation. This is certainly not helpful for forecasting!


Shareholders remain hopeful of a time in the not too distant future when the “underlying profits” at Lloyds (statutory profit adjusted for certain items) approximate the statutory profit. At that point (possibly in 2019 when PPI ends) Lloyds could afford a much higher payout. Whilst some dividend guidance would have been nice, consensus dividend forecasts at 3.85p might be a touch high – possibly 3.5p is more realistic (Lloyds still yields c. 6.5%) in a yield hungry market.

The board reaffirmed profit guidance for 2016 a positive given the upheavals of 2016, the shares (53.67p) at sub tangible book value (54.9p) look tempting notwithstanding the UK government share overhang/ cautious credit demand environment. We are a cautious BUY at this level with a 60p price target.

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